Nick Train has denied there are any liquidity issues with LF Lindsell Train UK Equity, after a leading investment research house downgraded the fund for this reason
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LF Lindsell Train UK Equity has been the most consistent IA UK All Companies fund of the past decade, beating the sector average in every single one of the past 10 calendar years and the FTSE All Share index in nine of these.
It has made 361.65 per cent since launch in July 2006, putting it fifth out of the 170 funds in the IA UK All Companies sector with a track record of this length.
However, the team at Square Mile Investment Consulting & Research claimed that with the fund growing to £6.7bn, it has become a victim of its own success.
“This [outperformance] has undoubtedly led to the strategy attracting a large body of assets following an investment approach that results in a low turnover and highly concentrated portfolio,” it said.
“Given the current liquidity levels within the underlying stocks held, we believe there could be significant issues should the fund experience a prolonged period of and/or a sizeable level of redemptions.
“Following an extensive review of the LF Lindsell Train UK Equity fund, we have taken the difficult decision to downgrade the fund’s rating from AAA to A.”
John Monaghan, head of research at Square Mile, said the structure of the fund is also a concern.
“It is a NURS, a Non-UCITS Retail Scheme, which means it doesn’t have to follow the 5/10/40 rule, so it is more concentrated,” he explained. “As the portfolio’s assets have increased, the stocks in the portfolio have become less liquid with less turnover – meaning they are traded less often compared with the rest of the market.”
Train (pictured) has said he would like to keep the portfolio in the same sort of shape in the event of significant redemptions. With this in mind, Monaghan claimed the fund could run into problems if major outflows were coupled with a sustained period of underperformance.
“Admittedly, there are a lot of what-ifs, and we are just erring on the side of caution,” he added. “We still have conviction in the fund, just not as much as we had before.”
Yet Train brushed off these concerns.
“Well, it’s a concentrated portfolio,” he said. “But 90 per cent of the portfolio is in FTSE 100 companies or companies that are of FTSE 100 scale. We are invested in very, very substantive, multi, multi-billion pound companies. It doesn’t seem illiquid to me.”
Referring to potential problems in the event of mass redemptions from the fund, he simply pointed to a comment from one of his clients, who said: “If everyone wants their money back all at the same time, nothing is liquid”.
Portfolio holdings as at 29/11/2019
Source: FE Analytics
Train was reluctant to dwell on the issue of liquidity, or another potential threat to his strategy that is regularly brought up. When asked about how rising rates would affect the ‘bond proxy’ stocks in his portfolio, he simply replied: “I don’t know. I don’t know. All I would say is, I became a better investor when I stopped asking myself questions like this.”
Instead, he preferred to talk about reasons for optimism, claiming that with the FTSE All Share and major US indices close to their all-time highs and returning double-digit gains this year, “it’s clear we are in a golden period for equity investing”.
The manager added that while he is optimistic about the UK and the UK market, one is not necessarily dependent on the other. Instead the real question that investors should ask about the FTSE is, “is it right to be optimistic about the world?”
“Because when you buy the average share in the average UK company weighted, you're not buying an exposure to the UK economy,” he added.
“You're buying, for historic and cultural reasons, businesses that have a very, very global orientation.
“And I would just go back to my top-five holdings. I would say that the growth opportunities, the value creation still available from technology change and growing consumption in Diageo, in Unilever, in Relx, in London Stock Exchange and in chocolate [through Mondelēz], remain very fine.”
Train pointed out that Diageo [Guinness Brewery and Grand Metropolitan before 1997], Unilever and Relx – which make up three of the top-five holdings in his Finsbury Growth & Income Trust and LF Lindsell Train UK Equity fund – have made share price gains of between 10x and 18x since 1988, compared with about 4x from the FTSE All Share.
Of the younger stocks, meanwhile, London Stock Exchange has made more than 17x since it listed in 2001 and Mondelēz has more than doubled since the manager acquired a holding in the stock in 2012 as part of the takeover of Cadbury.
And Train said this proved the value of the “low turnover and highly concentrated strategy” that has been criticised.
Performance of fund vs sector and index since launch
Source: FE Analytics
“What do I take from that look back into time? I take comfort that outstanding businesses – and those five are outstanding by virtue of any criteria – will create wealth for patient investors so long as you're prepared to hold them for long enough,” he finished.
“And that's precisely, precisely the effect that we're looking to capture.”